The outsourced chief investment officer (OCIO) industry in the United States is comprised of approximately 96 active OCIO providers managing an estimated $1.9 trillion in global assets under management (AUM). In many OCIO arrangements, there are three types of organizations involved: the institution, the OCIO provider, and the asset managers selected by the provider to manage the institution’s assets. However, in a survey conducted by Cerulli Associates, providers estimate that 36% of their clients make use of a fourth type of organization: OCIO search consultants.

OCIO search consultants—who aid institutions in the evaluation, search, and review of providers, and assist clients in selecting a provider that best matches their needs—have a significant amount of influence. “They often have the greatest insight into the OCIO space, and can provide their clients with clarity and transparency in an industry that can be opaque,” says Chris Swansey, analyst at Cerulli. “Despite myriad challenges that search consultants face, the service they offer will become more valuable as more OCIO clients evaluate their existing relationships and conduct a greater number of replacement searches for their providers.”

Many OCIO search consultants tell Cerulli that they do not stay with a client after the selection of an OCIO provider. However, many are re-engaged several years into the relationship to conduct an independent review of the provider, and—in an increasing number of cases—are asked to conduct replacement searches. Swansey explains that the relationship between the provider and their client is highly nuanced, and therefore important for the needs of the client to match the provider’s services. Providers estimate that 43% of their mandates in the past two years came from replacement searches.

The most significant challenge that search consultants face when working with providers is inadequate communication from around investment performance. There is no standardized method to evaluate provider performance, making it incredibly difficult to monitor. To get a sense of the performance their client can expect from the provider, search consultants will review composites, benchmarks, portfolio construction, similar client performance, or the performance of an OCIO provider’s oldest client. Due to the opaque nature of performance tracking, search consultants often must rely on providers with whom they have developed a relationship and on whom have been able to conduct in-depth due diligence.

“OCIO search consultants are an important and influential intermediary between OCIO clients and providers,” adds Swansey. “Therefore, it is of the utmost importance for providers to form relationships with search consultants by being open and transparent about their performance, fees, and service offerings.”

Cerulli’s first quarter 2020 issue of The Cerulli Edge—U.S. Institutional Edition explores the impact of search consultants and the increasing competition that providers encounter when selling OCIO services.